A new round of penalty letters are expected to be sent out later this year. More than 300,000 proposed-penalty letters were sent by the IRS this summer and late last year for alleged violations of the ACA’s employer mandate in 2015. Employers can expect to see 2016 assessment letters before the end of 2018. Employers need to be prepared.
Penalties Are Proposed, Not Final
The proposed-assessment letters, called Letters 226J, are preliminary employer shared responsibility payment (ESRP) assessments, these are not final assessments. Some employers incorrectly assume that the IRS cannot be challenged, the IRS proposed assessment can and should be challenged if based on erroneous information.
Most assessments relate to errors on reporting forms, and the IRS has been willing to reduce the penalties if the employer provides an explanation to the IRS regarding the errors.
Under the ACA, employers with 50 or more full-time employees must submit Form 1094-C to the IRS, along with Form 1095-C; these forms contain information about their employees’ health coverage. Form 1095-C also is sent to full-time employees. A reporting error on one of these forms may result in a proposed penalty.
The IRS may provide the employer with a list of employees who, in the absence of being offered minimum essential coverage from the employer, received a premium tax credit. The list shows the months for which a premium tax credit was received and what codes were reported on Form 1095-C for each of these employees.
Often, employers realize that the employees on the premium tax credit list were simply assigned incorrect codes for certain months on Form 1095-C. For example, an employer may have failed to put in a code showing that an employee was not a full-time worker in a certain month. In response to the assessment letter, employers can provide correct codes for the premium tax credit listing, making a reduction in penalties more likely, they said.
The IRS is not asking for information on every one of a large employer’s full-time employees, just those on the premium tax credit list, they added.
Penalties Are Here for Now
Some believe they can ignore the assessment notices because they believe they are not subject to the penalty or that the ACA will be repealed. This is a mistake. Failing to timely respond to a notice will result in the IRS making the assessment based on the information it has. Ignoring the IRS assessment is not an effective strategy.
Employers that received an assessment notice for 2015 should look at their 2016 and 2017 reporting to see if they can expect additional notices.
The IRS continues to refine this penalty process, and it doesn’t look like the assessment letters are going away anytime soon, so being aware of them is important.